New health law brings changes in flexible spending plans

Health costs

Many over the counter drugs to be barred, and limits will be restricted to $2,500

April 23, 2010|By Walecia Konrad, The New York Times

Thanks to the sweeping new health law, your flexible spending plan is about to become a bit less flexible.

Flexible spending accounts have long been a valuable tool for budget-wise consumers. They let you use pretax dollars to pay for eligible out-of-pocket health care expenses. You agree to set aside a certain amount each year, usually through paycheck deductions, based on what you expect your health care needs to be.

By using pretax dollars, you can reduce your overall cost for these items by about 20 percent, estimates Jennifer Calhoun, a principal with Mercer Health and Benefits, a consulting firm.

Another attraction had been the extremely generous list of eligible expenses — including deductibles and co-pays, eyeglasses and dental work, over-the-counter cold medicine, sunscreen and vitamins. But under the new law, starting Jan. 1, flex-spend users will no longer be able to submit claims for over-the-counter medicines unless they have been specifically directed to use them by a doctor.

For many consumers, having to start paying for cough drops or Tylenol with after-tax dollars probably is not a big deal. But the change will probably be felt by people with chronic illnesses who depend on drugs that have gone from prescription-only to over-the-counter status, like Claritin or other allergy medicines, or heartburn pills like Pepcid, Calhoun said.

And there is another big flex-spend change ahead: starting in 2013 the annual limit that any employee may contribute to these plans will be restricted to $2,500. Many companies had allowed much more.

The policy rationale for that change is simple. As the health law ushers in more comprehensive, affordable coverage, Kelly Traw, a principal at Mercer's Washington Resource Group, said the assumption was that employees would have less need for flexible spending accounts. And the revenue the government may get by limiting this tax break is meant to help finance the nation's health care overhaul.

If you look only at the averages, the new cap actually seems more than adequate. Although about 85 percent of companies with 500 or more workers offer health care flexible spending benefits, only 27 percent of eligible employees use them, according to Mercer. And the average account annual account balance is about $1,400 — far less than even the new limit.

The relatively low set-asides may be because employees are wary of the dreaded "use it or lose it" rule. If you deposit more than you spend on qualified expenses in your account, you forfeit the unused funds. You cannot roll them over into the next year.

That said, chronically ill people and others who now aggressively use their flex-spend accounts (say, parents with two teenagers who need braces) will feel the financial squeeze of the lower maximum.

Take Susan Luskin of Hollywood. Luskin, 58, suffers from Crohn's disease, an inflammatory intestinal condition. And her husband, Paul, 61, is being treated for diabetes, high blood pressure and high cholesterol. Together they spend $350 a month on co-payments for prescription drugs.

Those costs, along with doctor visits and the over-the-counter vitamins Luskin must take for deficiencies caused by her disease more than absorb the $4,000 flexible spending contribution her company allows. "And that doesn't include any vision or dental bills," Luskin said.

"When the new limit comes in, I'll be paying more out of pocket and losing the tax break," Luskin added. "People on a tight budget who are ill will feel the difference."

Luskin, who runs a company that administers flex-spend accounts and health savings accounts for Florida businesses, notes that people who use the high limits on their current plans often do so as a way to budget for their health care costs in the coming year.

"They know the money is put aside for health care needs," she said. With a lower limit, these employees may find it more difficult to fit health care into an already squeezed budget.

As the new health care law is phased in, anyone using flexible spending accounts should keep the following advice in mind:

Calculate carefully. As always, you will need to decide how much you want to contribute to your flex-spend account during your firm's open enrollment period this autumn.

Make a careful tally of your 2010 claims, so you can see how much you spent on over-the-counter medications. If you are not expecting any other eligible medical expenses to make up for the difference, you will need to deduct that amount from your contribution.

Spend in December. Most companies that offer flex-spending accounts also allow a grace period through March of the following year, during which you can continue using the previous year's flex-spend dollars on eligible expenses. But even if your company allows such a grace period, as the new law now reads you will not be able to claim over-the-counter drugs after Jan. 1, 2011.